Concerned about rampant speculation, China acted today to let some air out of the rapidly inflating equity bubble:

• China will raise benchmark deposit
and lending rates (effecitve Saturday) in an attempt to control rapid
credit and investment growth

• The one-year yuan lending rate will be increased by 18
basis points to 6.57% from 6.39%. The one-year yuan deposit rate will be increased by
0.27% to 3.06% from 2.79%.

• China’s central bank said it will raise banks’
reserve requirement ratio by half a percentage point, effective June 5.

• China will also widen the trading
band of the yuan against the dollar to 0.5% above and below its central
parity rate, effective Monday.

One would expect these events to be be felt in the coming weeks, especially in the Asian bourse. In the U.S., "expiration related noise" may be muting the impact this morning, said Peter Boockvar of Miller Tabak.

Why are Chinese Central Bankers so concerned with the public rushing headlong into their own stock bubble?

• Their
indices are now up 55% year to date, and have tripled in a relatively
short period of time.

• The P/E of the Chinese stock markets are now over
50.

• New trading accounts are opening by the 1/4 million each
day. The number of brokerage accounts
set up to buy mainland shares and mutual funds amounted to 327,019 [Wednesday]. Investors opened a record 385,121 new accounts on May 8.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

China should remember the years 1990 2000 when a prolific money supply had devastating consequences on its banking system which was under assistance as plaged with poor performance loans (the strengh of the financial systems is their amnesia)

I’ve heard that ~300,000 brokerage accounts have been opened daily in China over the last few weeks. Yup, 300,000.

All of these moves will have little impact and I don’t think the government will get serious for quite some time. They can’t afford to pop the bubble ahead of the Olympics. Social unrest is not what that country needs ahead of the games.

-Gross at Pimco (earlier quoted by BR and linked) has given something of a mea culpa on his assessment of the equity markets, lesser so but still a meecuppa as well on rates and bonds out at the end of their target range (3-5 years), although he’s still holding to economic weakness in the U.S. and lower rates in the short term (you left that off, Barringo).

-The market is ignoring every poor indicator of upcoming weaknesses, as though they don’t exist or they won’t bridge us to worsening conditions, or that they’ll be overcome by other factors that improve at the same time and compensate for weakness.

-I’m tingling with bullishness, so much so that I have to hold a gun on myself while I’m shaving, just so I won’t cut my own throat before I can do some buying.

-I’m gonna sell my house and move to Kudlowvia.

-Jack Bourousian is on CNBC and bearish this AM… I’m livin’ in the Bizarro World.

China IS serious, and they have learned from history. They’re taking this in baby steps to avoid the spectacular implosions of other historic bubbles, starting with the People’s Daily commenting on the bubble last week in order to discourage individual investors (but not much was impacted in terms of the continued run-up), and now these small measures ahead of their upcoming visit to Washington. But they only waited about a week to see that the newspaper prodding had no effect, so they are demonstrating that they will take stronger, more direct measures to continue tweaking things until the Chinese people get the message that this stock market party isn’t going to continue as it has. The thing to know about China is that they take a long time to deliberate the potential impact of actions before they take any, but once they eventually decide on a course, they resolve to stick to it and give it time to work (unlike some countries I know). Kind of like a global tortoise vs. hare contest between them and the U.S., if you will. Unfortunately, we all know how THAT turned out…and they feel time and history are on their side. After all, which country has been an extremely important global influence for thousands of years, going back to the Great Wall, Confucius, the Huns, the Silk Road, etc., and which has been one for a couple hundred?

“All of these moves will have little impact and I don’t think the government will get serious for quite some time. They can’t afford to pop the bubble ahead of the Olympics. Social unrest is not what that country needs ahead of the games.”

do you really think governments and the fed have control over this liquidity beast to prick the bubble or glide the economy onto the tarmack at the precise time they request?

if it was only that easy! i can’t see how china will hold past this summer, let alone next summer.

Bob A: Residential deposits in China declined by a record $22b in April (biggest monthly decline since ’97) and it’s estimated that ~$10b of deposits removed during the first 4 months have gone into the stock market. Deposits are still up YoY through the first four months but $40b less than the amount of the increase during the first 4 months in 2006.

Erik: I’m not saying that China will be able to safely stop this runaway train but what I am saying is that they will do little try to derail it. China will crash hard but the government will do everything possible to keep the pump primed to delay the meltdown.

Isn’t it hilarious to see the press report this as conciliatory actions ahead of the trade meeting with the US? Since when did China care what the US thought? They are making these moves because they can’t get a grip on the economy and by association, the equity bubble.

So, now they try to float the currency a little more, allow foreign investment, etc. So, in the US leading up to 1999 if the government encouraged investment in overseas markets, who would have listened? The Chinese are about to get a lesson in free markets. You let a little bit of the genie out and all hell will break loose. Central economic planning is bankrupt and is going to end the grand experiment with a bust.

Then, hopefully the Chinese people will gain the freedom and dignity every human deserves.

One would think by now that ample evidence validates the Austrian school of economic thought, that it is money supply (i.e. debt creation) that not only creates but sustains inflation.

As long as the rate of return exceeds the target rates the bubble will expand; history shows us that bubbles are not balloons that deflate showly – bubbles are tenuous entities and prone, when stretched far enough, to simply pop and disappear.

Every information outlet has limits on what they can cover or cover well. Given the time that goes into gathering the data and writing intelligent posts, Barry seems to have time for 1-3 posts a day. So, I prefer not to see Barry “mention” the basic headlines every one of us reads elsewhere.
It’s better (for us) he preserve that time for his “value-add” stories.

Perhaps China is playing the ultimate market play in relation to US Treasuries/Yuan. Once they have “seven good years” and stored enough internally for “seven bad years”, dump their inflated US treasuries and see the world markets go crashing down. With capital reserves, China then could buy industries for cheap.

Of course, people are never that manipulative so that would never happen.

Too many people are worried about the economy.”If everybody knows something it’s not worth knowing” goes a famous saying and I beleive it’s true.The other day a colleague pointed how an entire block of buildings are supported by services and housing and housing debacle will leave that place impoverished.Guess what born-in-america dudes just look at things one way: glass half empty.It’s such a shame ’cause optimism and unrelenting spirit was once symbol of this great country.When at school these complaining types seldom fail to mention how the world views this great country with a jaundiced eye.I always wondered where was the source for such negative view. Emulation is the greatest form of flattery one wise man had said.All one had to do was to look around and see Americanism being emulated, replicated all around the world.It’s only to be expected since Mankind has always been led by the greatest civilizations of the day.It started with Sumer and continues to this day with Americans.But all you hear from these pessimistic fellows averse of new competetion is doom and gloom.Well that’s good for me ’cause I am making plenty of moolah being long this market.
I was short in February and long in March.My point is how many people were bearish in 2000? The sort of pervasive bearishness out there doesn’t typify a long term top.When a respectable research institute like ECRI predicts that we are due for a reacceleration after a short slowdown why it would be such an outlandish
proposition.Is my conclusion drawn upon a quick perusal of some housing crisis blog, financial newspapers advantages me so much so that my diagnosis of economics status-quo would be superior to a dedicated economic research institute with an unenviable record?I don’t think so.

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Quote of the Day

"The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious." -W. Joseph StroupeEditor, Global Events

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